Expert Opinion

[EXPERT OPINION]: Startup Wisdom – Before Getting Started 

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There will always be excitement for first-time entrepreneurs. As the feeling of making something on their own and dream of changing the world is so strong that, we skip a few important things. These look very simple as nowadays incorporating a company is not a big task. But just getting an incorporation certificate is not all.

I have listed down few things which every startup founders should take care while moving ahead in their startup journey. These points should be included in the Founder’s Agreement.

5 things every startup founder must take care of in founder’s agreement
1) Equity related:

You all know that companies are owned by stockholders and you and your co-founders are going to be the first stockholders. If you are a founder team of two or more, you have to think about how you’re going to allocate that stock. The best way to allocate stock among the founders is to think about the challenge of execution.

 

 

equity in startups

Know the equity to be shared/distributed. (Image Source: Gust)

It is not necessary to give majority shares to the person with the idea as the value will be created in future with the help of everyone. If there are issues in deciding the stock allocation at the very start when you have not even started, then there is some trust issue among founders and you should think before heading ahead. 

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For a college startup or just out of college, in most of the cases, all founders divide shares equally. But if a set of professionals start a company, then the distribution happens according to who is bringing what and how much in terms of investment, expertise and industry connects.

As startups don’t have a brand name or many perks to offer like large organizations, they also keep aside a pool of shares for ESOP to attract the best talent at an affordable cost. This ESOP is also bounded by conditions like the number of years to be dedicated to the company, time to convert their options etc. 

2) Determination of designations, roles and responsibilities:

If you are starting right after college and everyone comes from a similar background, then you should rotate your responsibility every quarter until you find the person best suited for the role. And as the person would be very passionate about whatever s/he is doing, the productivity would be also at a peak. For the ones who are starting up after a stint in the corporate world, they are well aware of skills they are good at and hence distribute their responsibilities accordingly. 

3) Non-compete Clause & IP Rights:

We believe that if an individual has worked for years in a particular domain, then he would obviously keep working in the same field in future as well. However, the non-compete clause can be formulated in a way that it doesn’t take away the company’s existing clientele and IP rights. Also, Non-disclosure clause is imperative as in some projects the IP lies with the client. 

Non-compete clause startup

Non-Competition Agreement. (Image Source: iPleaders Blog)

It’s really important is that all the founders and in the future, everyone who works for your company has signed a confidentiality clause. And I’m sure a lot of you have heard of these; it’s a piece of confidential or proprietary information, the invention assignment agreement. It protects the company’s confidential information and trade secrets and ensures that all the intellectual property that is created is owned by the company. So you should have everyone in the company signed up to one of these. 

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4) Deadlock clause:

Use of mediation/arbitration for the board where a team size is an odd number, it can be handled with the majority. For other cases, the team can assign Veto Power to one person with mutual consent.

deadlock clause startup

(Image Source: Odgers Law Group)

So this eliminates indecisive situations. However, there are times of crucial decision making were mentors or advisor can come to rescue. 

5) Exit Mechanism

Generally, Founder’s shares should be subject to vesting. And this ties back to the point I just made about all the work is ahead of you. Vesting means that you don’t get full ownership of your stock until a certain period of time has passed. During the vesting period rather, you can vote all of your shares. But if you quit your company before the full period of time has passed, the company will automatically repurchase all of your unvested shares. When shares are subject to vesting, they’re called restricted stock. So your founder stock purchase agreement will be actually a restricted stock purchase agreement. And the standard or typical vesting period is about three to four years. 

However, it completely depends on the stage of the company and the stakeholders involved. Also, at this time your Founder’s agreement comes in use to avoid any disputes. 

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